Performance measures

A performance measurement system contains a set of performance measures. The measures can be used for different purposes, they have different features and they indi-cate different performance aspects. The measures can be grouped based on their fea-tures. Generally, the measures can be split into financial and non-financial measures.

Financial measures are easily transferrable into monetary value (e.g. operating income), but non-financial measures are not (e.g. delivery accuracy). Both financial and non-fi-nancial measures are noted in many performance measurement frameworks in order to

get a more balanced view of performance. Neely (2002) suggest using as less as three financial and three non-financial relevant performance measures, which all affect to the financial result of the company. However, it is not always easy to see the cause and effect relation between a non-financial performance measure and the financial result.

Moreover, the financial effects may remain thin due to the weak link between an indicator and financial result. Some indicators are also widely criticized due to their short-term incentives while the business focus should be in long-term profitability.

Another way to split the measures is to divide them between leading and lagging indi-cators. The indicators that lead the performance are continuously monitored and lagging ones are reported afterwards illustrating the realized performance. O’Connell and O’Sul-livan (2016) underline the importance of understanding how strong connection there is between a lead indicator and the future financial performance. The link may be strong, weak, non-existing or even negative, which should be noted in the measure implemen-tation and especially when conducting actions based on the measure. O’Connell and O’Sullivan (2016) use customer satisfaction as an example of a measure that may have strong influence on future performance in some companies and industries, but the impact can be weak in another context.

Parmenter (2020) again, talks about result and performance indicators. Result indi-cators sum up if the organization is heading to the right direction. They express multiple teams’ succeeding in their common task and thus they are important information for shareholders. Result indicators are reported on a monthly or quarterly basis, while per-formance indicators should be daily monitored. Perper-formance indicators are linked to a specific team’s effectiveness, making them more helpful for management in improving team’s performance. The success but also the possible failure that performance indica-tors show can be easily targeted to an individual or a team, hence it is easy to identify where the actions need to take place. (Parmenter, 2020)

The performance measure division into two groups is quite similar in many publications, even the terms and perspectives towards the topic vary. However, the measures can be roughly divided into performance and result indicators and their characteristics are listed in Table 2.

Table 2. Indicator separation into performance and result indicators.

Performance indicators… Result indicators…

1. lead performance.

2. are non-financial.

3. are followed at least every week.

4. offer useful information to management.

5. illustrate the performance of a specific function or an employee.

1. lag outcome.

2. are financial.

3. are reported monthly or even less fre-quently.

4. offer useful information to shareholders.

5. sums up organization’s overall results.

Parmenter (2020) further separates these two indicator categories into four by dividing both into key indicators and indicators. Thus, the four indicator types are key perfor-mance indicators (KPI), perforperfor-mance indicators (PI), result indicators (RI) and key result indicators (KRI). The key -prefix expresses that the indicator is particularly important in order to attain strategic goals. He states that many organizations have misunderstood the meaning of key performance indicator as it is often used to describe a wider range of statistics than it really covers. His indicator division is shown in Table 3.

Table 3. Performance measures and their objectives (after Parmenter, 2020).

INDICATOR OBJECTIVE

KEY PERFORMANCE INDICATOR Indicates the performance of critical success factors.

PERFORMANCE INDICATOR Indicates what the teams are delivering.

KEY RESULT INDICATOR Indicates the performance of an organization.

RESULT INDICATOR Indicates what results the organization reach.

The performance measures can be categorized many ways and their weaknesses and opportunities are widely studied. When considering a single performance measure, de-fining the critical elements of the measure must take place in the design phase. Neely et al. (1997) introduce a structured record sheet that aims to help designing a single per-formance measure. The record sheet consists of ten elements that all are justified in their publication. The elements in the record sheet are title, purpose, business objective, tar-get, formula, reporting frequency, measurer, source of data, person who acts on the data and the actions they do based on the measure. The elements are shown in Table 4.

Even the record sheet is not the only way to design performance measures, it provides

a clear structure in the measure design and forces to define many important measure dimensions already in the measure design process. For example, the performance measurement objective behind the measure and the provoking actions are defined to make sure the measures are not only reviewed but reacted as well. The performance measures developed in this research are finally introduced by utilizing the structure of the record sheet.

Table 4. Performance measure record sheet (according to Neely et al., 1997).

Title The title of the measure must be clear.

Purpose Measure must have a measurement purpose.

Relates to The business objectives the measure relates to must be de-fined.

Target The target can be an improvement percent for a specific time or a target performance level that is enough in satisfying the objective.

Formula The formula how the measure is calculated is very important as it affects on the people behavior. The formula should val-idly and reliably support the performance measurement pur-pose in fulfilling the business objectives.

Frequency The measuring and reviewing frequency should be adjusted adequately.

Who measures? The measures should be identified to avoid confusion who is responsible of it.

Source of data The source of data needs to be specified and the measure should be consistently calculated from the same source to make the reviews comparable.

Who acts on the data? The person who acts on the measure should be identified.

What do they do? The actions driven by the measures finally realizes the pos-sible benefits of performance measurement. However, some-times the performance is evaluated as defining it as accepta-ble or unacceptaaccepta-ble. The acceptaaccepta-ble performance may not necessarily generate actions. Moreover, the detailed actions may be very difficult to define in advance.

Notes and comments If there’s any other notes or comments regarding to the measure, they can be written here in the end.

A common understanding within the literature is that different measuring purposes re-quire different measures. However, there is no common guidance which indicators should be used in each context and how the indicators should be weighted compared to each other. Due to Cauvin et al (2010) and Neely et al (2005), the financial measures are still more used than non-financial measures, while O’Connell and O’Sullivan (2016) state that non-financial measures may positively affect to the future performance if used correctly. However, there are many challenges regarding to measuring and valuing non-financial aspects. Thus, managers should carefully consider which indicators fit the best for a certain purpose, as it is stated that widely used financial indicators alone may not be the best ones for managerial purposes.

Besides the measures itself should be carefully developed their purposes in mind, an-other popular research topic has been the number of the performance measures. Com-panies tend to have more measures than necessary (Meyer, 2003, p.7). There is no common opinion how many performance indicators is ideal, but especially large compa-nies tend to have spread and broad spectrum of different indicators. Parmenter (2020) suggests using about 10 high-level KRIs in a governance report for the board, and up to 20 KPIs and PIs in a balanced scorecard for the management. He suggests that the performance indicators should express the current or future performance, so that the management can influence company’s performance by monitoring and reacting to these measures. Meyer (2003, pp.19-23) criticizes that performance always expresses the past or the current situation, meaning the performance of the future is not realized and thus cannot directly be measured. Despite the problems and concerns around perfor-mance measurement, Parmenter (2020, p.206) have made a list of features winning KPIs have: they are nonfinancial measures, they are measured at least once every week, they provoke actions in senior management level, the indicator clearly shows which actions need to be done, they tie the responsibility straight to a team or an individual, they have a significant impact, and they encourage for appropriate action.